STRATEGY ANALYSIS

Strategy analysis - external business environment (Techniques 1-2)

PESTLE analysis and Porter's Five analysis.

PESTLE Analysis is used to analyse and identify the factors that are external to an organisation, that have
an impact on it. The technique helps to perform a thorough investigation of the global context within
which the organisation operates. Given below is the expanded form of PESTLE.

P - Impact of Political factors (local, regional, national and international)

E - Impact of Economic factors (local, national, global)
S - Impact of Socio-cultural factors (trends in personal and professional lives)
T - Impact of Technological factors (platforms, technologies and trends)
L - Impact of Legal factors ( national and global legislations and regulations)
E - Impact of Environmental/Ecological factors (national and global issues)

PESTLE analysis gives a handy reference for considering the key areas that are potential sources of
change and/or impact for the organisation Once identified, the key factors that could potentially have a
significant impact on the organisation are prioritised. Based on the impact that these factors may have,
the actions required to counter or minimise the impact are then defined and implemented.

Porter's Five-Forces Analysis

Porter’s model attempts to analyze the attractiveness of an industry by considering five forces within a
market. According to Porter, the likelihood of firms making profits in a given industry depends on five
factors: (1) barriers to entry and new entry threats, (2) buyer power, (3) supplier power, (4) threat from
substitutes, and (5) rivalry. Porter’s five-forces model of competition expands the arena for competitive
analysis. Historically, when studying the competitive environment, firms concentrated on companies
with which they competed directly. However, firms must search more broadly to identify current and
potential competitors by identifying potential customers as well as the firms serving them. Competing
for the same customers and thus being influenced by how customers value location and firm capabilities
in their decisions is referred to as the market microstructure. Understanding this area is particularly
important because, in recent years, industry boundaries have become blurred. For example, in the
electrical utilities industry, cogenerators (firms that also produce power) are competing with regional
utility companies.

New Entrants
The likelihood of new entry is a function of the extent to which barriers to entry exist. Evidence suggests
that companies often find it difficult to identify new competitors. Identifying new entrants is important
because they can threaten the market share of existing competitors. One reason new entrants pose
such a threat is that they bring additional production capacity.

Buyer Power
The stronger the power of buyers in an industry, the more likely it is that they will be able to force down
prices and reduce the profits of firms that provide the product. Firms seek to maximize the return on
their invested capital. Alternatively, buyers (customers of an industry or firm) want to buy products at
the lowest possible price—the point at which the industry earns the lowest acceptable rate of return on
its invested capital. To reduce their costs, buyers bargain for higher-quality, greater levels of service, and
lower prices. These outcomes are achieved by encouraging competitive battles among the industry’s
firms.

Supplier Power
The stronger the power of suppliers in an industry, the more difficult it is for firms within that sector to
make a profit because suppliers can determine the terms and conditions on which business is
conducted. Increasing prices and reducing the quality of its products are potential means used by
suppliers to exert power over firms competing within an industry. If a firm is unable to recover cost
increases by its suppliers through its pricing structure, its profitability is reduced by its suppliers’ actions.

Substitutes
This measures the ease with which buyers can switch to another product that does the same thing, such
as using aluminum cans rather than glass or plastic bottles to package a beverage. The ease of switching
depends on what costs would be involved (e.g., while it may be easy to sell Coke or Pepsi in bottles or
cans, transferring all your data to a new database system and retraining staff could be expensive) and
how similar customers perceive the alternatives to be. Substitute products are goods or services from
outside a given industry that perform similar or the same functions as a product that the industry
produces.

Rivalry
This measures the degree of competition between existing firms. The higher the degree of rivalry, the
more difficult it is for existing firms to generate high profits. The most prominent factors that experience
shows to affect the intensity of firms’ rivalries are (1) numerous competitors, (2) slow industry growth,
(3) high fixed costs, (4) lack of differentiation, (5) high strategic stakes and (6) high exit barriers.

Strategy analysis - internal capability (Techniques 3-5)

There are three techniques that may be used to examine the internal capability of an organisation:
MOST Analysis, Resource Audit and the Boston Box

MOST Analysis is a powerful internal analysis technique that looks within the organisation. There is only
one mission to an organisation, but there can be numerous objectives, which in turn can be approached
in many strategies. Each of these strategies may lead to several tactics. Make sure your objectives follow
the SMART principle (In case you wonder what the SMART principle is...Specific, Measurable,
Achievable, Realistic, Time-critical).

Resource audit is an internal strategic analysis technique used to understand the current state of an
organisation's resources and competencies. It helps to identify what the organisation currently has that
we can build on and what are the areas that it needs to improve upon. Broadly these resources are
categorised into two groups - tangible or hard and intangible or soft. The tangible resources comprise
physical, financial and human assets, whereas the intangible competencies include the intellectual
capital and brand equity.

As the name suggests, the resource audit technique can be used as a check list in taking stock of the
hard and soft aspects of the organisation's resources. These range from the buildings and financial
assets to intellectual capital and brand equity. An important tip is note down both the positive aspects
(i.e., strengths) and negative aspects (i.e., weaknesses) under each of the categories.

Given below is the list of the resources under the relevant categories;

Physical Human

 Buildings, Land  Staff, roles and responsibilities

 Stock, Equipment  Expertise and experience
 Materials
Know-how
Financial  Trade marks and copyrights
 Intellectual property
 Cash flow
 Credit Reputation

 Brand awareness and brand equity

 Goodwill in the market and among
customers

BOSTON BOX
Portfolio Analysis tool, more popularly referred to as Boston Box helps with understanding and
categorising the products (and/or services) within an organisation. It is an internal analysis technique
that helps to analyse the portfolio investments, in terms of market share held and the market growth.

The products and business units are divided into following four quadrants:

Wild cat - New entrants (Low market share, but high market growth)
Star - Potential for growth (High market share, and high market growth)
Cash cow - Matured (High market share, but low market growth)
Dog - On the declining path (Low market share, and low market growth)

The portfolio analysis enables to have a deeper look at the strategic investment at the various business
units, thereby aiding better decision making in investment re-allocation.

After plotting the products/business units on the map across the axes of market growth and market
share, the management is in a better position to decide about the strategic investments in the
organisation's portfolio.

Typically, the following decisions are relevant based on the quadrant in which they fit in:

Wild cat - Build (need more investment and support at this stage)

Star - Hold (need a sustained level of investment)

Cash cow - Milk/ harvest (need to leverage their returns generating ability)

Dog - Divest (need to drop them at the earliest, as they sink the investments)

Strategy definition (Techniques 6-7)

There are two techniques that may be used to define organisational strategy:
SWOT analysis and Ansoff's matrix.

SWOT analysis is one of the most popular by firms to analyze and plan their strategies for
strategic analysis models. It involves looking at growth. The matrix shows four strategies that
the strengths and weaknesses of your business' can be used to help a firm grow and also
capabilities, and any opportunities and threats analyzes the risk associated with each strategy.
to your business.
Understanding the Ansoff Matrix
Once you identify these, you can assess how to:
The matrix was developed by applied
capitalise on your strengths mathematician and business manager, H. Igor
minimise the effects of your weaknesses Ansoff, and was published in the Harvard
make the most of any opportunities Business Review in 1957. The Ansoff Matrix has
reduce the impact of any threats. helped many marketers and executives better
A SWOT analysis gives you a better insight into understand the risks inherent in growing their
your internal and external business business.
environment. However, it does not always The four strategies of the Ansoff Matrix are:
prioritise the results, which can lead to an
improper strategic action. Market Penetration: This focuses on increasing
sales of existing products to an existing market.
One way to make better use of the SWOT Product Development: Focuses on introducing
framework is to consider the customer's new products to an existing market.
perspective when making strategic plans and Market Development: This strategy focuses on
decisions. You can do this by applying entering a new market using existing products.
importance-performance analysis (IPA) to Diversification: Focuses on entering a new
market with the introduction of new products.
identify SWOT based on customer satisfaction
surveys. Strategy implementation (Techniques 8-9)

The approaches that support the

implementation of strategy are
McKinsey's 7-S model and the four-view model
The Ansoff Matrix, also called the McKinsey's 7-S model
Product/Market Expansion Grid, is a tool used
 Four-View
The model categorizes the seven elements as Model
either "hard" or "soft":
The three "hard" elements include: POPIT, also referred to as 4-View Model or
holistic model outlines the various dimensions
Strategy: this is your organization's plan for within an organisation. Using POPIT, we can
building and maintaining a competitive interpret and analyse the dependencies among
advantage over its competitors. these various aspects from organisational
Structure: this is how your company is structures, people, processes, information and
organized (how departments and teams are technology. It provides a framework to derive a
structured, including who reports to whom). comprehensive and integrated approach for
Systems: the daily activities and procedures that understanding the dependencies of the
staff use to get the job done. proposed change on the hard and soft aspects
These elements are relatively easy to identify, and
within the organisation.
management can influence them directly.
Holistic model identifies the four areas within
The four "soft" elements includes: the organisation, as mentioned in the acronym
POPIT:
Shared Values: these are the core values of the
organization and reflect its general work ethic. Processes - Key business processes to deliver
They were called "superordinate goals" when products & services to customers
the model was first developed. Organisation - Structure, resources, roles and
Style: the style of leadership adopted. responsibilities
Staff: the employees and their general People - Staff and resources who carry out the
capabilities. work
Skills: the actual skills and competencies of the Information Technology - Hardware systems
organization's employees. and software applications that support the
organisation's work .

Performance measurement (Techniques 10-12)

All organisations need to monitor performance. This section explains two techniques used to identify
performance measures and carry out the evaluation.

Critical success factors/key performance indicators, and the Balanced Business Scorecard technique
KPI’s (Key Performance Indicators) are a useful management tool and provide a practical measure of
performance. Generally, they tend to be one dimensional though and are invariably financial, or some
other metric that reflects on financial performance.

At the most strategic level, CSF’s (Critical Success Factors) provide a powerful tool to focus
organisational resources to get the most ‘bang per buck’.
However, at a day-to-day implementation level, the balanced scorecard has evolved from its early use as
a simple performance measurement framework to a full strategic and management system.

The balanced scorecard transforms an organisation’s strategic plan from an attractive but passive
document into the specific detail for the organisation on a daily basis.

It provides a framework that not only provides performance measurements, but helps planners identify
what should be done and measured. It enables executives to truly execute their strategies and aligns
business activities to the vision and strategy of the organisation. It improves internal and external
communications, and monitors organisational performance against strategic goals.

performance measurement framework that added strategic non-financial performance measures to

traditional financial metrics, to give managers and executives a more 'balanced' view of organisational
performance.

Design of a balanced scorecard is about the identification of a small number of financial and non-
financial measures and attaching targets to them, so that when they are reviewed it is possible to
determine whether current performance 'meets expectations'.

By getting managers to easily identify areas where performance deviates from expectations, they can be
encouraged to focus their attention on these areas, and hopefully as a result trigger improved
performance within the part of the organisation they lead.

The balanced scorecard approach provides a clear prescription as to what companies should measure in
order to 'balance' the financial perspective. It is a management system that enables organisations to
clarify their vision and strategy and translate them into action.

It provides feedback around both the internal business processes and external outcomes in order to
continuously improve strategic performance and results.

When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise
into the nerve centre of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of
past events, an adequate story for industrial age companies for which investments in long-term
capabilities and customer relationships were not critical for success. These financial measures are
inadequate, however, for guiding and evaluating the journey that information age companies must
make to create future value through investment in customers, suppliers, employees, processes,
technology, and innovation."

The original thinking behind a balanced scorecard was for it to be focused on information relating to the
implementation of a strategy. Over time there has been a blurring of the boundaries between
conventional strategic planning or control activities and those required to design a Balanced Scorecard.

This is illustrated well by the four steps required to design a balanced scorecard included in Kaplan &
Norton's writing on the subject in the late 1990s:

Translating the vision into operational goals;

Communicating the vision and linking it to individual performance;
Business planning; index setting
Feedback and learning, and adjusting the strategy accordingly.